The Roanoke Times has an article today about a lawsuit against a company that accepted a $1.4 million grant from the Commonwealth yet failed to follow through with its end of the bargain. Surprisingly, there is no claim made against the defendants for violations of the Virginia Fraud Against Taxpayers Act, which as regular readers know is the single most potent weapon in the litigation arsenal of the Commonwealth.

As regular readers also know, most states maintain economic incentives to lure industries to their state, and Virginia is no exception. Like all government programs, these programs are subject to abuse and, in fact, problems with the Virginia’s incentive grants programs are nothing new and have been covered here before on several different occasions.

Talk about a potential goldmine of taxpayer money…and then it went south.

UNRAVELING THE FALSE CLAIMS — THE ROANOKE TIMES INVESTIGATES THE VEDP

A Roanoke Times investigation revealed a web of unsavory characters and unsavory activity that stretches across the world. It turns out that Virginia economic officials did minimal background research, apparently basing their decision to approve a $1.4 million grant on a fake company website. The litany of horrors is widely available for anyone to read, and in addition to the current lawsuit, the Virginia State Police have opened a criminal investigation into the matter, according to a news report.

The VEDP has had problems in Court and has had to change lawyers — it seems like the initial lawyers representing the VEDP were conflicted out of the case. The Virginia Economic Development Partnership, under its new counsel, notified Judge Blessing that it wanted to amend the Complaint in the lawsuit pending against Lindenburg.

But, there is no word on whether that amendment will include a claim under Virginia Code 8.01-216.1 et seq., otherwise known as the Virginia Fraud Against Taxpayers Act…it certainly seems like it should…more to come readers, stay tuned.

The Virginia Attorney General Race in 2017

The New Year will hold lots of new developments for the Virginia Fraud Against Taxpayers Act. Among the most important of them will be the upcoming Attorney General election. The 2017 race will mark the first time since the 1980’s that a sitting Attorney General has run for re-election.

Let’s take a look at how the election is shaping up.

DEMOCRAT MARK HERRING SEEKS RE-ELECTION AS ATTORNEY GENERAL

Democrat Mark Herring is, as most of you know, running for re-election. This is the first time since Mary Sue Terry was re-elected attorney general in 1989 that a sitting Attorney General has run for re-election. Putting aside General Herring’s other work as Attorney General (some of which has been controversial) he has used the Virginia Fraud Against Taxpayers Act more aggressively than his predecessors. In fact, as reported here last year, General Herring’s office finally broke my own record for the largest non-healthcare recovery under the VFATA.

THE REPUBLICAN CANDIDATES

There are currently two Republicans competing for the Attorney General nomination — Richmond lawyer John Adams, and Virginia Beach lawyer Chuck Smith. A few weeks ago, Del. Rob Bell dropped out of the race. Rob (who competed with Mark Obenshain for the Republican nomination in 2013) was favored to win the primary. Now that he isn’t running this is anybody’s ball game.

Adams and Smith are both impressive candidates. Both have considerable experience, including Navy JAG Corp experience. As would be expected for a Virginia Republican primary, both of the candidates have a straightforward Republican approach to issues like individual responsibility, gun control, minimizing government interference with the economy, lowering taxes, etc.

It might be my imagination, but it seems like Chuck Smith’s materials have a bit of a populist flavor, while Adams’ materials seem more “mainstream” for lack of a better word.

With the two Republican candidates coming from such similar backgrounds and running on similar platforms, it is likely to come down to a contest of personalities and who Virginia Republicans feel will offer them the best shot at victory in November.

CONCLUSION

As we learned in 2008, the man (or woman) in the street cares but little for the nuances of legal work. They care even less about the specific types of work of performed by the Commonwealth’s Attorney General. Instead, it seems like they vote for Attorney General the same way they vote for any politician — they go with what their gut tells them. As discussed previously in this blog, there is nothing inherently wrong with that, and that is just as good a way as any to pick the next Virginia Attorney General in 2017.

No matter who wins the Republican primary, Herring seems likely to have a fight on his hands come November.

Defend Trade Secrets Act Litigation in Federal Courts

As regular readers know, the Defend Trade Secrets Act of 2016 is one of the biggest developments in the world of qui tam / whistleblower law from this past year. What makes it an important development to the world of qui tam / false claims act litigation is its immunity provisions for whistleblowers who remove documentation from their place of employment to support thier cases.

The DTSA, with its immunity provisions, was signed into law in May of this year, and as we close out the year cases concerning the immunity provisions are beginning to filter in. The reported decision so far, in my opinion, shows us some important things, but nothing we didn’t already know. Mainly, being a whistleblower is not without risks.

Unum Group v. Loftus — the first immunity case concerning documentation of a case

Just in time for the end of the year, we have an unpublished decision from the federal District Court in Massachusetts, Unum Group v. Loftus, 2016 WL 7115967 (D.Mass., 2016). Plaintiff brought this case against its former employee after he was seem — on video no less — removing multiple file boxes, shopping bags and briefcases full of documents from his employer’s facility after normal business hours and without authorization. This apparently happened at least two different times. When a corporate security official called him to ask him what he had been doing removing the documents and materials, he refused to answer questions about it.

Right after he hung up the phone, he was seen — again, on video — leaving the office with a laptop and returning without the laptop. After he apparently refused to return any of the documents or the laptop, Unum filed a Complaint against him in U.S. District Court alleging that Loftus misappropriated protected information.

Loftus filed a Motion to Dismiss the Complaint, asking the Court to dismiss Unum’s trade secret claims on the grounds that he gathered the and removed the documents from Unum to report and investigate a violation of law. He was, he argued, immune from any liability for trade secret misappropriation pursuant to 18 U.S.C. § 1833(b), which as readers of this blog know, shields individuals from liability under any federal or state trade secret law for disclosure of a trade secret made “in confidence … to an attorney … solely for the purpose of reporting or investigating a suspected violation of law.”

Conclusion

Naturally, of course, the District Court ruled that this was not an appropriate grounds for a Fed. R. Civ. P. 12(b)(6) motion to dismiss. That makes sense, because the DTSA is an affirmative defense to a claim of trade secret misappropriation and affirmative defenses are almost never appropriate for decision under 12(b)(6). As it turns out, I happen to agree with the District Court.

As I have been saying here for several years now, documentation of a qui tam case is not to be taken lightly by a potential relator. Moreover relators should use common sense and be discreet. There is, in my experience, never a reason to remove “multiple file boxes, shopping bags, and a briefcase full” of documents, and while that is especially true in this day and age of digital information, even in the days of paper it would be absurd to remove so much information…of course, no one should ever truly remove any documents from thier employment, but that is another topic for another day.

I wish Mr. Loftus well, but he has made his bed and now, I fear, he will have to lay in it.

President-elect Trump selects key government officials

As regular readers know, this blog is completely non-partisan and will support any elected official who supports vigorous enforcement of the federal False Claims Act.

As President-elect Donald Trump begins naming the key government officials who will guide his administration, I figured it was worth a look to see how some of the folks feel about qui tam/false claims cases. As I have said before, false claims laws enjoy bipartisan support; there are also a small number of people in both parties who would like to see the FCA gutted. While it may not be possible to determine exactly how any one nominee will handle FCA matters, here is what we know about the nominees for two of the most important positions in government for false claims act enforcement.

Attorney General Nominee Jeff Sessions

Trump has identified Sen. Jeff Sessions as his nominee for Attorney General. This is, of course, a very important post for FCA enforcement. The vast majority of the public information available about Senator Sessions concerns his supposed hard-line stance on deporting illegal aliens who have committed crimes.

A bit more digging however reveals someone who should be quite good on FCA-issues. For example, Sessions is a former United States Attorney, which means that FCA enforcement would have fallen in his bailiwick. He is also a former Attorney General for the state of Alabama. He also voted in favor of the FERA amendments (which strengthened the federal FCA).

As regular readers also know, Sen. Charles Grassley (R-IA) has been a stalwart proponent of the federal False Claims Act as well as state false claims acts. So I was happy to read that Sen. Grassley meet with Jeff Sessions this week and discussed the importance of the federal FCA with him.

Only time will tell how Sen. Sessions will handle federal False claims act enforcement as AG…

A second government position that will be critical to qui tam/FCA enforcement is that of HHS secretary. Representative Tom Price (R-GA) has gotten the nod for this position. We don’t know too much about how Rep. Price feels about FCA legislation — he is a doctor, and not a lawyer — but we do know that he has railed against fraud, waste and abuse in government programs, including health care programs.

Yesterday, the Joint Legislative Audit and Review Commission issued a less-than-flattering report on the Virginia Economic Development Partnership Authority (“VEDP”). As a result, today’s post takes a look at how the Commonwealth can combat VEDP fraud using the Virginia Fraud Against Taxpayers Act.

I was wondering, recently, about the lack of qui tam actions under the Virginia Fraud Against Taxpayers Act concerning these economic development projects, and perhaps this JLARC report shows us part of the reason.

Background on the Virginia Economic Development Partnership Authority

Most if not all states have one or more organized entities tasked with promoting in-state business development; these entities also reward businesses for setting up shop in or relocating to that state. The hit Netflix series House of Cards is filmed in and around Baltimore, Maryland, for example, and it is specifically because of the Maryland Film Office and its efforts to lure more television and films to Maryland with a combination of tax breaks and other incentives.

In Virginia we also have several entities, including VEDP. In broad terms, VEDP administers incentive grant programs designed to lure businesses to Virginia, encourage existing businesses to expand operations in Virginia and to boost Virginia’s exports abroad. Since 2006, it has awarded more than $350 million to companies.

Mind you, there is at least some evidence for the idea that all of these entities either do not work or are not worth the money that the several states pay for them, but that is a different argument.

Findings of JLARC — and the utility of the Virginia Fraud Against Taxpayers Act

As regular readers know, the Virginia Fraud Against Taxpayers Act is a very effective tool for rooting out fraud and abuse of our tax dollars. But — and this is a pretty big but — those cases can only be prosecuted where and when there are clear contractual and regulatory provisions in place.

VEDP had no documented policies and procedures for critical aspects of administering grant awards prior to January of 2016 — in other words, about the same time as the JLARC report was kicked off.

The report also includes a finding that many of the projects supported through VEDP incentive programs did not meet their performance requirements, but that finding is a given under these circumstances.

Conclusion

I always repeat this when I blog about fraud and the government of the Commonwealth. I do not — repeat, do not — think that Virginia has more fraud than other states — in fact I strongly suspect that we have less fraud than other states. But we have to be constantly vigilant to root out fraud and corruption wherever we can, or at least see to it that someone, somewhere has the right tools to do so.

Attorney Fee Awards and Reasonable Hourly Rates for Lawyers

Attorney fee awards and reasonable hourly rates for lawyers are important to us here at vaquitamlaw.com because, as regular readers know, the federal False Claims Act and the Virginia Fraud Against Taxpayers Act both contain mandatory fee-shifting provisions. As regular readers also know, courts use the loadstar approach — which consists of a reasonable hourly rate multiplied by a reasonable number of hours worked — in determining whether a fee is reasonable. It is easy to describe the loadstar formula — but it is apparently much tougher to actually prove a reasonable rate and then prove a reasonable number of hours.

Today’s post will focus on reasonable hourly rates charged by lawyers and in particular on some of the claims made recently in various places about standard rates for attorney’s fees.

As with many things in the world of law, a little more digging will be beneficial.

First, WSJ relied on what firms themselves said about their hourly rates, which means there is a certain amount of puffery involved. I can hear it now “You know, my normal hourly rate is $1,500 per hour, but just for *you* dear client, I will charge you *half* of that…please don’t tell my other clients.” The client then walks away feeling like he or she had gotten a real bargain…for $750 per hour.

Second, these are the rates charged by senior partners which means, by definition, that their work on cases will be limited. Civiletti could charge $1,000 per hour because most of his work consists of using his contacts, knowledge, and so forth…as a former Attorney General, he is not going to be rolling up his sleeves and going through boxes of documents…he is going to devise a strategy for a case and supervise the lower-priced partners and associates of Venable.

Third, WSJ relied on public information from bankruptcy petitions, but lawyers who think it even remotely possible that a client could go bankrupt will often list their highest rates because they know if they become a creditor in bankruptcy, they are going to get a fraction of that.

One thing is certain — statutory fee-shifting provisions are definitely not punitive in nature…so I suspect we will all have to wait for a lawyer to be awarded $1,500 per hour by a court.

I came across this discovery order on qui tam whistleblower privilege and I thought I would share it, as it seems to cover a number of topics discussed recently on this blog. The case is captioned United States ex rel. Yoash Gohil v. Sanofi U.S. Services, Inc., et al. and is pending in the U.S. District Court for the Eastern District of Pennsylvania.

More specifically, the opinion concerns relator/plaintiff’s Motion to Compel (documents and other information which he alleges were not covered by the attorney-client privilege) and the defendants’ cross motion to Compel discovery from relator (of documents allegedly recieved by this relator from a relator in another case). Also interesting to note that the motion and cross motion together constitute about 80 pages, while the Judge’s order consists of only four pages.

Talk about pithy legal writing…

Happy reading folks, this is important stuff — issues pertaining to the attorney-client privilege and the rights of whistleblowers are sure to figure prominently in the near term.

Federal Jurisdiction and State False Claims Act Litigation

Today we will take a look at an interesting case brought under the Virginia Fraud Against Taxpayers Act and whether there is federal jurisdiction for state false claims act cases. The case — Commonwealth of Virginia ex rel. Hunter Labratories et al. v. LabCorp of America, et al. — was issued by the U.S. Court of Appeals for the Fourth Circuit this summer and it is the first case I know of examining these issues.

BACKGROUND — Hunter Labs and State False Claims Act Litigation

In December of 2007 Hunter Labs filed a qui tam action under seal in the Circuit Court for Fairfax County, Virginia. The action was brought under the Virginia Fraud Against Taxpayers Act and alleged that most of the major laboratory companies in the United States submitted false claims to the Commonwealth of Virginia’s Medicaid program. Specifically, relator alleged that defendants charged Virginia’s Medicaid program more than their usual and customary charges in violation of Virginia Code § 8.01–216.1 et seq., and offered and gave discounts on laboratory tests for non-Medicaid services in order to induce purchasers to refer Virginia Medicaid laboratory business to them in violation of various federal anti-kickback statutes dealing with health care.

And there we have the first interesting bit about this case. For some reason, relator chose to file the case in a Virginia state court (therefore bringing claims only the VFATA and foregoing the federal False Claims Act) rather than in federal court. Had relator chosen to file in federal court, it would have been able to bring claims under the federal FCA as well as a pendent state law claim for each state with a state false claims act.

I have no idea why the case was filed in state court and not in federal court — but as will be seen shortly, the relator — and his lawyers — later paid the price for it…

It is also worth noting that this was not the first state false claims act case filed by this particular relator. In 2005, Hunter filed a qui tam lawsuit — also against the same defendants — in a California state court under the California False Claims Act. The allegations in both cases were quite similar. California exercised its right to intervene in 2009, and in 2011, Quest settled the lawsuit for $241 million and LabCorp settled for $49.5 million.

Ultimately, for whatever reason, the Commonwealth determined not to intervene in the Virginia case. Following that decision relator chose to move forward and served the Complaint on the defendants, as was its right under the VFATA. Defendants then removed the case to the U.S. District Court for the Eastern District of Virginia, alleging that the VFATA claims arose under federal law and, therefore, were removable to federal court pursuant to 28 U.S.C. § 1331.

Because some of my regular readers are not lawyers, a few words about federal jurisdiction are in order. As most of us learned in high school civics, federal courts are courts of limited jurisdiction; Article III, Section 1 of the U.S. Constitution specifically creates the United States Supreme Court (and gives Congress the power to create such lower courts as it deems fit) and Article III, Section 2 provides the specific types of claims over which federal courts have jurisdiction.

The most common reasons for federal jurisdiction include federal question jurisdiction and diversity jurisdiction. The main point here is that federal courts are courts of limited jurisdiction and a litigant can bring their case in federal court if — and only if — it falls under one of the relatively few categories outlined in the U.S. Constitution and the laws Congress has passed concerning that authority. Along those same lines, if the plaintiff could have filed his or her Complaint in federal court to begin with, defendants are able to remove it to federal court when they are served.

But, again, cases can only be litigated in federal court if the case falls under one of relatively few limited categories.

Litigation in the Eastern District of Virginia after Removal

After removal, things proceeded pretty much along the usual course. Some preliminary skirmishing took place, and then the parties began to talk settlement. In a non-intervened action like this one, relators stand to receive a minimum of 25% and a maximum of 30% the government’s recovery. The parties reached a settlement agreement; as part of that agreement, Quest agreed to pay $1,250,000 to the Commonwealth. The relator’s share was then agreed — by the Commonwealth and relator — to be a presumptively-reasonable 28%.

So far, so good. I imagine the relator was quite surprised, however, to learn that the amount was determined to be $138,925 instead of the more attractive number of $350,000. That is because Medicaid is a joint program funded by the federal government and each participating state — the Commonwealth splits the bill 50/50 with the feds. The Commonwealth has to return part of any money it recovers to the federal government, so she took the position that she could only pay relator from her part of the proceeds.

Relators, however, didn’t see it that way, so it was necessary to have a contested proceeding on the appropriate amount to be paid to relator. After litigation over the relator’s share, Judge Trenga entered an order granting the Commonwealth’s motion and paying relator $138,925. Relator wasn’t satisfied with that either, so they appealed to the Fourth Circuit, arguing there that they had been wronged in the District Court.

Oops! Federal Courts Never Had Juridiction in the First Place

The appeal resulted in an outcome which I am quite certain the relator had not contemplated — in fact it seems that neither the relator, or the Commonwealth, or the defendants had anticipated the ruling. The Court of Appeals ruled that federal jurisdiction was missing in the first place and that the case should never have been removed. The Virginia Fraud Against Taxpayers Act is a state statute; the removal had been premised on the theory that the claims, which alleged an overcharge of Medicaid reimbursements, independently required proof of a violation of the federal anti-kickback law.

The Court, applying the well-pleaded complaint rule, found no federal cause of action…so the Court of Appeals vacated and remanded to state court.

Federal False Claims Act Penalties Increase

As regular readers know, any person violating the FCA is liable to the United States for treble damages, attorney’s fees and costs, and civil penalties of not less than $5,500 and not more than $11,000 per false claim submitted. These civil penalties — which have been a part of the federal False Claims Act since the very beginning in 1863 — are set to increase this summer.

The penalty will increase to a minimum of $10,781 and a maximum of $21,563. If these penalties seem severe, consider the following: first, the penalty amounts have not been raised for more than ten years, and maybe as long as twenty years. Second, if the penalties seem high, consider that the original FCA carried a civil penalty of $2,000.00 per false claim in 1863 when it was passed. If we calculate that amount in today’s dollars, it would equate to a penalty of roughly $38, 878.04 for each false claim after inflation.

The increased civil penalties apply to acts occurring on or after August 1, 2016.

The challenge — and opportunity — of civil penalties

Historically, DOJ has used penalties as an incentive to settle — that is, DOJ has taken the position that if a case must be litigated, civil penalties will be sought, but if a defendant is willing to accept a settlement, the penalties can be compromised. As a result, there is not as much case law on the topic of civil penalties as there might otherwise be.

One of the more interesting questions in FCA litigation involves determining the number of claims for which defendants should be subject to civil penalties. While it is clear that multiple penalties are possible under the FCA, counsel should be aware that large penalty awards could be subject to challenge under the Eighth Amendment’s Excessive Fines Clause if disproportionate to the amount of the damages to the government.

The number of civil penalties in a given case is a question of fact for the jury to decide. Traditionally it was thought that courts lacked discretion to reduce the number of the penalties once a jury had made a finding but the Fourth Circuit Court of Appeals reached a different result in a 2013 case. In United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., the Fourth Circuit found that the district court had authority to enter judgment against the defendant for something other than the 9,136 false claims found by the jury where the relator was willing to accept a remittitur to $24 million to bring the penalty within the constitutional limits of the Eighth Amendment’s Excessive Fines Clause.

What about the Virginia Fraud Against Taxpayers Act?

The Commonwealth is required to update the Virginia Fraud Against Taxpayers Act to keep pace with any changes to the federal FCA, and that includes the amount of the civil penalties. In the Commonwealth the General Assembly will need to act on increased penalties in the 2017 General Assembly session.

And rest assured that we will keep our readers abreast of any changes to the law…

Implied certifications and conditions of payment have their day in Court

On June 16, 2016 the Supreme Court issued its much-anticipated opinion in Universal Health v. Escobar. The opinion — which was unanimous and was authored by Justice Thomas — deals with important principles in the world of the federal False Claims Act like “implied certification” and “conditions of payment” but before going further I want to point out one thing about the importance of Escobar or, in fact, of any SCOTUS opinion.

The importance of Escobar? That is very much to be determined…

One thing I think all Americans learned during the Bush v. Gore case in 2000 is that reading and understanding Supreme Court opinions on the fly is an extreme sport not for the weak of heart. But, if it is difficult to read SCOTUS opinions on the fly, it is impossible to discern right away how significant any one particular SCOTUS opinion will be over the long haul. Sometimes, opinions mark an important change in the legal culture of the United States. As one example I would refer my readers to the Celotexand Liberty Lobbyopinions in 1986 that ushered in the modern era of summary judgment in federal courts.

Other times, opinions that seem important when they are issued turn out to be less than important. A good example of this is the Desert Palace case from 2003. In the world of employment law this opinion was interpreted as SCOTUS saying that more employment law plaintiffs would get a jury trial. The reality turned out very differently. When opinions turn out to be less important than they seem it is generally because the lower courts (who do most of the interpreting on a day to day basis) interpreted the opinion differently, and SCOTUS lacked the time or the interest to follow up and reinforce its initial opinion.

But, for what its worth, here is what we know for sure. The Escobar opinion certainly means the following two things: (1) The “implied certification” theory of false claims act liability is valid under some circumstances; and, (2) In order to serve as a predicate to an FCA violation, a contractual, regulatory, or statutory provision does not need to be labeled a “condition of payment.”

The holdings of Escobar — and the things that interested people have said so far

Many folks on the relator’s side (like Senator Grassley (R-IA)) found the opinion to be a great plus for taxpayers. Leading FCA defense lawyers like Jack Boese and Jesse Witten also found some things to like about the Court’s ruling.

So here is my take: I think the opinion is a win for relators and for taxpayers. Some relator-side FCA lawyers didn’t like the fact that SCOTUS didn’t rule that every claim for payment implicitly represents that the billing party is entitled to payment. By the same token, however, the Court clearly ruled that by submitting claims for payment to the Medicaid program for counseling services by individuals working in certain specific roles — when the services were in fact performed by individuals filling those roles but lacking the qualifications normally associated with those jobs — the defendants submitted a false claim to the United States.

With regard to the “condition of payment” ruling, the Court held that in order to rise to the level of an FCA violation, a defendant must violate a law or regulation that would be materialto the government’s decision to pay, regardless of whether that condition is labeled by the government as a condition of payment. This of course is good because there are a great many important rules that are not specifically labeled as “conditions of payment.” The Court also said, however, that merely labelling something a “condition of payment” is not enough to make it material under the federal FCA. The Court provided certain indicators of the government’s view of materiality, such as the routine payment of claims despite regulatory noncompliance, or rigorous government enforcement of a particular regulation and payment denials in instances of noncompliance.

Only time will tell how this opinion will play out…and stay tuned readers, because SCOTUS recently granted two new writs in FCA cases.